Using a quantitative model that features technical progress in automation and endogenous skill choice, we show that, given the current U.S. tax system, a sustained fall in automation costs can lead to a massive rise in income inequality. We characterize the optimal tax system in this model. We find that it is optimal to tax robots while the current generations of routine workers, who can no longer

This paper explores the consequences of extremely low real interest rates in a world with integrated but heterogenous capital markets, nominal rigidities and an effective lower bound (a ZLB for simplicity). We establish four main results: (i) At the ZLB, creditor countries export their recession abroad, which we illustrate with a new Metzler diagram in quantities; (ii) Beggar-thy-neighbor currency

We introduce a new model of repeated games in large populations with random matching, overlapping generations, and limited records of past play. We prove that steady-state equilibria exist under general conditions on records. When the updating of a player’s record can depend on the actions of both players in a match, any strictly individually rational action can be supported in a steady-state equilibrium

This paper studies equilibrium dynamics in consumer durable goods markets after aggregate credit shocks. We introduce two novel features into a general-equilibrium model of durable consumption with heterogeneous households facing idiosyncratic income risk and borrowing constraints: (i) indivisible durable goods are vertically differentiated in their quality and (ii) trade on secondary markets at market-clearing

We derive a fully nonlinear optimal income tax schedule in the presence of private insurance. We fill the gap in the literature by studying the optimal tax formula with a comprehensive structure of the private markets—including incomplete markets models— both theoretically and quantitatively. As in the standard taxation literature without private insurance (e.g., Saez (2001)), the optimal tax formula

Asymmetric information in the marriage market may cause adverse selection and delay marriage if partner quality is revealed over time. Sexual safety is an important but hidden partner attribute, especially in areas where HIV is endemic. A model of positive assortative matching with both observable (attractiveness) and hidden (sexual safety) attributes predicts that removing the asymmetric information

AbstractThis article develops a theory of the balance sheet channel that places a central emphasis on the liquidity of secondary markets for macro-contingent claims. We show that the presence of dispersed information and imperfect competition in secondary markets, interacted with financial constraints, results in mispricing and misallocation of aggregate risk, distorts aggregate investment, and exacerbates

We study competitive equilibria in a signalling economy with heterogeneously informed buyers. In terms of the classic Spence (1973, The Quarterly Journal of Economics, 87, 355—374) model of job market signalling, firms have access to direct but imperfect information about worker types, in addition to observing their education. Firms can be ranked according to the quality of their information, i.e.

Fixed differences loom smaller when compared to large differences. We propose a model of relative thinking where a person weighs a given change along a consumption dimension by less when it is compared to bigger changes along that dimension. In deterministic settings, the model predicts context effects such as the attraction effect but predicts meaningful bounds on such effects driven by the intrinsic

We examine how many and what kind of firms ultimately rely on foreign inputs, sell to foreign markets, and are affected by trade shocks. To capture that firms can trade indirectly by buying from or selling to domestic firms that import or export, we use Belgian data with information on both domestic firm-to-firm sales and foreign trade transactions. We find that most firms use a lot of foreign inputs

Communication is integral to organizations and yet field evidence on the relation between communication and worker productivity remains scarce. We argue that a core role of communication is to transmit information that helps co-workers do their job better. We build a simple model in which workers choose the amount of communication by trading off this benefit against the time cost incurred by the sender

This article introduces a general equilibrium model of endogenous technical change through basic and applied research. Basic research differs from applied research in the nature and the magnitude of the generated spillovers. We propose a novel way of empirically identifying these spillovers and embed them in a framework with private firms and a public research sector. After characterizing the equilibrium

This article studies the introduction of an EU-wide emission standard on the automobile market. Using panel data from 1998 to 2011, I find that firms decreased emission ratings by 14%. Firms use technology adoption and gaming of emission tests to decrease emissions, rather than shifting the sales mix or downsizing. I find that the standard missed its emission target, and from estimating a structural

We show that helping young job-seekers to signal their skills to employers can generate large and persistent improvements in labour market outcomes. We do this by comparing an intervention that improves the ability to signal skills (the 'job application workshop') to a transport subsidy treatment designed to reduce the cost of job search. We find that in the short-run both interventions have large

Macroeconomists traditionally ignore temporary price markdowns (“sales”) under the assumption that they are unrelated to aggregate phenomena. We revisit this view. First, we provide robust evidence from the U.K. and U.S. CPI micro data that the frequency of sales is strongly countercyclical, as much as doubling during the Great Recession. Second, we build a general equilibrium model in which cyclical

We study when pure bundling, i.e., offering only the grand bundle of all products, is optimal for a multi-product monopolist. Pure bundling is optimal if consumers with higher values for the grand bundle have higher relative values for smaller bundles compared to the grand bundle. Conversely, pure bundling is not optimal if consumers with higher values for the grand bundle have lower relative values

In dynamic games, players may observe a deviation from a pre-play, possibly incomplete, non-binding agreement before the game is over. The attempt to rationalize the deviation may lead players to revise their beliefs about the deviator’s behaviour in the continuation of the game. This instance of forward induction reasoning is based on interactive beliefs about not just rationality, but also the compliance

We study the Markov perfect equilibrium in a dynamic game where agents have non-constant time preference, decentralized households determine aggregate savings, and a planner chooses climate policy. The article is the first to solve this problem with general discounting and general functional forms. With time-inconsistent preferences, a commitment device that allows a planner to choose climate policy

In this article, we provide mechanisms for exchange economies with private information and interdependent values, which are ex post individually rational, incentive compatible, generate budget surplus, and are ex post nearly efficient, with many agents. Our framework is entirely prior-free, and we make no symmetry restrictions. The mechanisms can be implemented using a novel discriminatory conditional

What is the aggregate and distributional impact of microfinance? To answer this question, we develop a quantitative macroeconomic framework of entrepreneurship and financial frictions in which microfinance is modelled as guaranteed small-size loans. We discipline and validate our model using recent empirical evaluations of small-scale microfinance programs. We find that the long-run general equilibrium

In this paper, we use two comprehensive micro-data sets to study how the distribution of mortgage debt evolved during the 2000s housing boom. We show that the allocation of mortgage debt across the income distribution remained stable, as did the allocation of real estate assets. Any theory of the boom must replicate these facts, and a general equilibrium model shows that doing so requires two elements:

What is the relationship between bank capital, the risk of a financial crisis, and its severity? This article introduces the first comprehensive analysis of the long-run evolution of the capital structure of modern banking using newly constructed data for banks’ balance sheets in 17 countries since 1870. In addition to establishing stylized facts on the changing funding mix of banks, we study the nexus

We identify a new mechanism through which cultural diversity affects economic outcomes, based on a model of culture as shared cognition. Under this view, cultural diversity matters because it increases strategic uncertainty. The model can help better understand a variety of disparate evidence, including why homogeneous societies can be more conformist, why diverse societies may get stuck in a low-trust

This article studies the impact of immigration on wages, internal migration, and welfare. Using U.S. Census data, I estimate a spatial equilibrium model where labour differs by skill level, gender, and nativity. Workers are heterogeneous in city preferences. Cities vary in productivity levels, housing prices, and amenities. I use the estimated model to assess the distributional consequences of several

We study price competition and entry of platforms in multi-sided markets. Utilizing the simplicity of the equilibrium pricing formula in our setting with heterogeneity of customers’ membership benefits, we demonstrate that in the presence of externalities, the standard effects of competition can be reversed: as platform competition increases, prices, and platform profits can go up and consumer surplus

The communication revelation principle of mechanism design states that any outcome that can be implemented using any communication system can also be implemented by an incentive-compatible direct mechanism. In multistage games, we show that in general the communication revelation principle fails for the solution concept of sequential equilibrium. However, it holds in important classes of games, including

Markov regime-switching models are very common in economics and finance. Despite persisting interest in them, the asymptotic distributions of likelihood ratio-based tests for detecting regime switching remain unknown. This study examines such tests and establishes their asymptotic distributions in the context of nonlinear models, allowing multiple parameters to be affected by regime switching. The

We model the building of a city, estimate parameters of the model, and calculate welfare losses from institutional frictions encountered in changing land-use. We distinguish formal and slum construction technologies; in contrast to slums, formal structures can be built tall, are durable, and nonmalleable. As the city grows areas are initially developed informally, then formally, and then redeveloped

Can attitudes towards minorities, an important cultural trait, be changed? We show that the presence of African American soldiers in the UK during World War II reduced anti-minority prejudice, a result of the positive interactions which took place between soldiers and the local population. The change has been persistent: in locations in which more African American soldiers were posted there are fewer

This article provides the first causal estimates on the popular, cost-saving practice of diversion in the criminal justice system, an intervention that provides offenders with a second chance to avoid a criminal record. We exploit two natural experiments in Harris County, Texas where first-time felony defendants faced abrupt changes in the probability of diversion. Using administrative data and regression

We model a decentralized, dynamic auction market platform in which a continuum of buyers and sellers participate in simultaneous, single-unit auctions each period. Our model accounts for the endogenous entry of agents and the impact of intertemporal optimization on bids. We estimate the structural primitives of our model using Kindle sales on eBay. We find that just over one-third of Kindle auctions

This paper investigates the effects of development projects on economic networks. To this end, we study the impact that a randomly allocated Community-Driven Development program in The Gambia has on economic interactions within rural villages. The program provides an exogenous source of variation to village-level stocks of productive capital and to village-wide collective activities. Based on detailed